Given the following information concerning a convertible bond: Principal: $ 1,00

Question

Given the following information concerning a convertible bond:

            Principal: $ 1,000      Coupon: 4%                Maturity: 20 years     

            Call price: $ 1,030       Conversion price: $ 25                                  

            Market Price of common stock $ 19.00   Market Price of Bond $ 1,020.

            a)         What is the current yield of this bond?

            b)         What is the value of the bond based on the market price of the common stock?

            c)         What is the value of the common stock based on the market price of the bond?

Explanation / Answer

Value of the bond based on the market price of the common stock

Conversion Value (stock value of bond)= Conversion Ratio*Conversion Price of Share

=1000/19 *25

=1315.79

What is the value of the common stock based on the market price of the bond

Conversion

Bond Par Value 1000 Coupon Rate 4% Annual Interest 40 Market Price of Bond 1020 Current Yield= Annual Interest/Bond Price 3.92

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